The End of Big Money's Legitimacy


“The Star-Spangled Banner” became the national anthem on March 3, 1931, when the Congress and President Hoover formally recognized the anthem. In the midst of the Great Depression, a song about the flag flying proudly in the land of ‘the free and the brave’ gave encouragement. While the Stars and Stripes are still aloft, our nation’s financial impropriety now drags the flag through the dirt. Our U.S. Congress will continue to make laws but the destiny of the country is no longer theirs to command. We have passed the tipping point. The economic autonomy of the country is now hostage to financial leverage that we cannot live with or without. Debt is the drug; our nation is the leading addict.

We’ve lost our financial innocence incrementally and we’re just now realizing what it may cost us. We deplore the unAmerican nature of our near-ubiquitous bailouts but we cannot square our shoulders to pay for our sins. Increasingly, we don’t even know how to solve our problems politically. The sum of our three decade learning is that borrowed money thrown at problems tends to push them further into the future. That’s good enough for demagogues who care more about reelection and economic growth than financial justice. We’ve delayed accountability for greedy ways on previous occasions, so we feel little shame in following precedence. Thus compromised, our music is not of the free and the brave but a funeral dirge for liberties we’ve turned into license.

The Federal Reserve’s loose play with our money supply robs our capitalism of its legitimacy. Investment banks burdened with hedge fund exposures were the first to need new counterfeit money, their scurrilous excesses so profound that even their duplicity could not keep their speculative malfeasances concealed. A parade then formed of commercial bankers, brokers, business risk insurers, mortgage underwriters, housing speculators, automobile manufacturers, home builders, and such. Along the parade route other money-grabbers are preparing to enter the free-for-all: State governments, pension plans, local government districts, and general hazard insurers. Every special interest that pursued its ends with leverage wants to extract a subsidy from those who lived responsibly without non-collateralized debt.

Recently, a former member of Congress told me — I trust sarcastically — that we need an emergency government edict cancelling all private debt. In other words, the preferential nature of political subsidy in a bailout environment wrecks the whole idea of asset legitimacy and equitable (merited) desserts. So we might as well eliminate private sector leverage with a sweeping edict and give the newly de-leveraged assets to those who grasped mortgaged ownership of them through unsustainable financial practices. Of course, the idea is as outrageously immoral as it is absurd! But the cynical jab bears the point that to remedy the immediate crisis at the cost of de-legitimizing capitalism will do incomparably more damage than the 1930s economic depression.

Excellent arguments of a comparable nature can be found in Jon Markman’s December 03 Moneycentral article, “The New War to Save Credit”, and Jim Jubak’s December 05 Moneycentral essay, “Fake inflation numbers masked the crisis”. Jim Anderson at reaches a similar conclusion in his December 05 piece, “The liquidity trap”. Anderson argues that financial engineering is more dangerous than the alternative.

If the government subsidizes big banks so that their predatory hedge fund clients can hold onto assets leveraged 30:1, why shouldn’t government extend the same rescue to homeowners who tried to leverage into the asset inflation game in residential real estate? This “equality of treatment” issue may be the point of the Congressman, but it ignores the hazards of socializing bad debt. Profits gained through leveraged paper asset speculation give the winners a monetary claim upon all competitive wealth. Any bailout of Wall Street creates a future in which Wall Street can more extensively plunder the assets of everyday Americans. (It also creates a future where these people can increasingly buy the best of whatever is offered in retail trade, whether on Ebay or at Tiffany’s.)

The reality of subsidizing moral hazard to jumpstart growth is not as pretty as the bailout advocates paint it. Every bailout of debtors penalizes non-debtors — the people least deserving of being penalized for the errors of the greedy. Also, the write-down of mortgage debt for people over-leveraged in their homes not only undercuts the relative buying power of those who were more conservative with mortgage debt, it gives Wall Street an additional bailout on top of earlier ones.

The impending federal subsidization of real estate will provide Wall Street and the hedge fund industry with a stealth infusion of massive capital. Mortimer Zuckerman, Editor-in-Chief at U.S. News and World Report, argues in his December 01 magazine editorial that quick action is needed on the economy. Zuckerman’s argument can be read to suggest that the extraordinary way the crisis unfolded caught many elites off guard — from the managers of the Harvard University endowment to banking elites like Robert Rubin at Citibank. If so, it can be inferred that this boom-bust cycle cannot be allowed to run a normal market course because the hedging system elites put in place to heighten their advantages in the business cycle has failed to adequately protect them in their over-leveraged condition.

Due to the perversities of leverage when applied to exotic derivatives, the wizards of Wall Street have calculated (it appears) that they will have to capitulate in this crisis well before the buy-and-hold middle class can be induced to capitulate mutual fund holdings and real estate assets. A massive win for the people (especially the broad middle class) and “a leverage magnified defeat” for certain financial elites would be for elites a calamity of incalculable proportions. It could dramatically set back the approach of global plutocratic government — government where central bankers and other elites make the real decisions (as we’ve seen increasingly of late) while legislators take backseat roles along with pawn-type presidents steered by crafty handlers. In other words, a temporary economic recovery works to the interests of certain financial elites and against the long-term true interests of the masses. Elites are dissembling about this, feigning populism and concern about the general public. But it is their own money power that is the apple of their eye.

Now you can understand the recent outcry against “the specter of deflation and depression.” Deflation would speed the day of reckoning for elites. The big financial institutions still carry massive leverage (20:1). They can’t trim leverage further without selling assets into weak markets, thus turning paper losses into real ones. If they have to capitulate, it might be fifty years before they could become masters of the universe (instead of within fifteen years as they plan). So, they are using every tactic through the media to con American voters and politicians into re-inflating the financial system so that they can fix their hedges before further pursuing their original plans. Little wonder, then, that the FED has been willing to take incredible risks with its balance sheet to support the elites that it serves.

It appears that sufficient stimulus is in the works to resurrect the financial system, at least in ugly form. Markets should loosen, equities will likely stagger upward for awhile, and elites will be able to rework their positions based upon the genius of their learning. The recovery, however, will not be long-lived. Bear that in mind in making your plans.